Stop bank bashing, ANZ tells politicians

ANZ Banking Group
chairman
John Morschel
has called on politicians to stop spreading misinformation about the sector before the bank’s decision tomorrow on whether to lift interest rates independent of the Reserve Bank of Australia.

“I wish the politicians would get their facts straight before they start making public statements," he told The Australian Financial Review.

“There was no capital provided to any Australian bank by the government and the only thing they did was guarantee wholesale funding, for which they charged a fee and earned a hell of a lot of money from."

The funding pressure on banks was underlined yesterday when National Australia Bank did a $1.5 billion bond issue and paid the highest price on record to sell five-year debt in the local public market.

Mr Morschel’s comments come amid fierce and sometimes populist debate about the role of banks in what is proving to be a tough funding market. Bank cost of funds may force some lenders to increase mortgage interest rates out of step with moves in the official cash rate by the RBA.

NAB chief financial officer
Mark Joiner
said on Tuesday that higher funding charges had cost it $80 million over the past three months.

Glenn Baker, the chief financial officer of ING Direct, the country’s fifth biggest home lender with $38 billion of home loans, said yesterday that term funding costs had jumped “substantially" by 1 percentage point over the bank bill swap rate since the onset of the European sovereign debt crisis last August.

If funding costs did not ease or continued to rise, Mr Baker said, lenders would move to preserve margins.

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On whether banks could hold out for another six months, he said: “I don’t think they could hold on that long. Banks are intermediaries and if the cost of funding is going up, then the cost of lending has to rise too."

CLSA banks analyst Brian Johnson said that based on NAB’s statement on Tuesday that with the cost of money 1.95 percentage points above the swap rate, banks were making virtually no money from new home loans at ­current interest rates.

“Nobody is making money at that," Mr Johnson said. “The return on equity is sub 5 per cent, the cost of capital is well above that, so there is no economic return in doing house lending based on current pricing."

Home owners and business borrowers are bracing for the possibility that banks will lift rates independently of the RBA, starting with ANZ, which will hold a pricing committee meeting in Melbourne on Friday to decide what it charges for mortgages and business loans.

If ANZ lifts rates, the other big banks are likely to follow suit as they slug customers to make up for an increase in the cost of funds that they borrow on international markets.

Analysts estimate the banks have to lift interest rates by 0.10 of a percentage point to 0.15 of a percentage point to offset higher funding costs, which are rising due to Europe’s debt crisis.

Before ANZ’s interest rate pricing committee meeting in Melbourne on Friday, Mr Morschel made the assessment on the political commentary over banks, interest rates and alleged taxpayer support.

He declined to name any individual politician.

Still, Financial Services Minister
Bill Shorten
and Greens leader
Bob Brown
have suggested that because banks used the government’s triple-A credit rating during the global financial crisis, they should take this into account when setting interest rates and employing staff.

As
Westpac Banking Corp
last week confirmed plans to slash 560 jobs and send at least 100 jobs overseas, Mr Shorten said: “I hope we don’t see a breakout of corporate amnesia . . . By that I mean taxpayers government-guaranteed the banks." He added that banks did have a right to manage their own businesses.

The government has earned $3.1 billion so far in return for its guarantee of banks raising hundreds of billions of dollars in international capital markets. The guarantee for big deposits and wholesale funding was closed for new debt raisings in March 2010, but the government could still eventually collect up to $5 billion in fees from banks for funding sourced before that date.

Politicians criticised the banks yesterday, with Greens MP
Adam Bandt
urging the government to back legislation to force lenders to offer mortgages with interest rates that only moved in step with the RBA. “The [big banks] say they want government and politicians kept out of banking, and as soon as they get into trouble, they are the first ones to come cap in hand, asking for assistance," he said. Treasurer
Wayne Swan
said “we don’t regulate interest rates in this country" but added the banks were “extremely ­profitable".

“The notion that our banks can cry poor in this environment is simply not credible," Mr Swan said.

Suncorp Bank chief
David Foster
, head of the local bank in Mr Swan’s home state of Queensland, said funding costs were “absolutely" rising.

“It has been a competitive market in the housing sector as well as the deposit sector over the past few months, so everyone will be watching that with interest," he said.

“It is critical to the health of the economy that we have a financial sector that delivers reasonable returns so we can attract investment and funding and it also underpins economic growth.

“Given the volatility of markets, the whole industry has a watching brief on funding and the flow on implications of that, but we haven’t made any changes [to interest rates]."

A 0.10 percentage point rate rise would increase monthly repayment on a $300,000 mortgage by about $30.

Bracing for an independent interest rate move by one of the banks, Mr Swan reminded the public there had been two rate cuts last November and December. “If you’ve got a $300,000 mortgage you’re paying $3000 less a year than you were paying when the Liberals left office [in 2007]."

Shadow treasurer Joe Hockey said Mr Swan was being misleading.

“On average, effective interest rates paid by home buyers and small businesses were lower under the Coalition from 1996 to 2007 than they have been under Labor since the 2007 election," Mr Hockey said. “Under the Coalition, the average standard variable mortgage rate was 24 basis points lower than Labor."

In fact, both statements were correct because Mr Swan and Mr Hockey compared different periods.

Australian Bankers’ Association chief executive Steven Munchenberg said the RBA cash rate was no longer the single most important determinant of bank funding costs.

“While we have seen some modest improvement in the price of money overseas in the last few weeks, it is still back at levels last seen during the global financial crisis," Mr Munchenberg said. “Banks should be independent to raise interest rates. The banks will take into account that to raise rates at this point would be incredibly unpopular with customers and the broader community.

“But equally, the cost of money for the banks has increased and ultimately the banks will be in a position where they either pass some of those costs on or they reduce the amount of that expensive money they are raising and therefore the amount of money they are lending in Australia."

He also disagreed with statements by Mr Swan that the banks returns on equity, or profits, were among the highest in the world. Australia’s big four banks’ return on equity averages about 16 per cent, compared with 6 per cent for large banks in the US, 8 per cent in Europe and below 4 per cent in the UK.

Senior bankers argue the figures are distorted because many overseas banks have gone broke or struggled for profit since the credit crisis.

“That makes the banking system very nervous because particularly at a time when confidence in banking around the world is fragile, the last thing we need is to be sending out a message that our government wants less profitable banks in Australia," Mr Munchenberg said.

Commonwealth Bank of Australia and Westpac Banking Corp said they were keeping home loans steady after the RBA’s decision.

NAB has vowed to have the lowest home loan rates of the major banks, but has not ruled out an increase out of step with the RBA.

Senior ANZ executives will meet on Friday to make their decision.

Separately, the Financial Services Union said that Suncorp’s insurance business planned to offshore another 65 positions.

The Queensland based insurer has made several rounds of cuts as part of its ongoing efficiency program, making 71 positions redundant earlier this month. This takes the total number of job cuts made by Suncorp to 200 in the past four months according to the FSU, although the insurer said many staff had been redeployed.